The Securities and Exchange Commission (the "SEC") continues its increased enforcement activity against municipal issuers. On July 29, 2013, the SEC for the first time charged a municipal issuer with securities fraud for stating in an official statement that it was in full compliance with prior continuing disclosure undertakings, when in fact it had failed to make numerous filings, while also charging the underwriter and its principal with failing to conduct the necessary due diligence to confirm the accuracy of such statement. West Clark Community Schools, an Indiana school district; City Securities Corporation ("City Securities"), its underwriter; and City Securities' head of public finance, Randy Ruhl, were charged after an SEC investigation revealed that the school district stated in a 2007 official statement that it was in compliance with its continuing disclosure obligations, even though it had not submitted any of the required annual reports or notices since undertaking to provide such continuing disclosure in connection with a 2005 bond offering. The investigation also found that the underwriter did not conduct adequate due diligence to detect the false statement in the 2007 official statement.
West Clark Community Schools, without admitting or denying the SEC's findings, consented to an order to cease and desist from committing or causing any violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. The school district also agreed to undertake certain remedial actions, including the adoption of written policies for its continuing disclosure obligations; the designation of an individual responsible for ensuring compliance with those obligations; and the implementation of annual training for personnel involved in the bond offering and disclosure process.
In addition to finding that "City Securities, with Ruhl's substantial assistance, made recommendations without forming a reasonable basis regarding the accuracy of disclosures because of a lack of due diligence, resulting in the public dissemination of a materially false official statement," the SEC found that City Securities provided improper gifts and gratuities to representatives of other municipal bond issuers and then charged these and other expenses back to the issuers under the guise of costs for "printing, preparation and distribution of official statements."
City Securities and Ruhl, without admitting or denying the findings, agreed to settle the SEC's charges. City Securities consented to an order to cease and desist from committing or causing any violations of Section 17(a) of the Securities Act, Sections 10(b) and 15B(c)(1) of the Exchange Act and Rules 10b-5 and 15c2-12, and MSRB Rules G-17 and G-20. It also agreed to be censured and pay disgorgement and prejudgment interest of $279,446 as well as a penalty of $300,000 and to take a number of remedial actions to enhance its disclosure and expense reimbursement policies, including engaging independent compliance counsel.
Ruhl also consented to cease and desist from committing or causing any violations of these provisions of the federal securities laws and to pay disgorgement and prejudgment interest of $20,320 as well as a penalty of $18,155. Ruhl is permanently barred from association in a supervisory capacity with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent or credit rating agency and is also subject to other securities industry prohibitions.
This latest action follows close on the heels of the SEC's July 19, 2013, enforcement action against the City of Miami, in which the SEC filed civil charges against the City and its former Budget Director, alleging violations of the anti-fraud portions of the federal securities laws (see last week's Day Pitney alert), and earlier SEC actions against the City of Harrisburg, PA, (see prior Day Pitney alert) and the state of Illinois.
This week's SEC action emphasizes that the SEC is continuing to increase its scrutiny of public finance disclosures and the necessity of post-issuance compliance. The attorneys in Day Pitney's Municipal Finance Group routinely counsel clients on proactively addressing compliance with their disclosure obligations. Please feel free to contact any of the attorneys on the right of this alert if you would like to discuss this alert or your disclosure obligations.